[Editor's Note: Today's post from Passive Income, MD is about misconceptions that often hold us back from achieving the goal of financial independence.]
It’s early July, and this time each year, we have some time to think about our independence and freedom. We also celebrate and spend time to be grateful for those that helped us achieve that.
Everyone reading this certainly has a lot to be grateful for. But I also know that there are those that might feel a bit trapped in their current life situation.
Some might hear the term “financial freedom” and think it’s a pipe dream; unachievable, or something to think about in the far distant future.
Well, I’ve spent the last five or six years pursuing this seemingly whimsical dream, and I’ve been fortunate enough to see it to reality. Through my experience, I’ve also learned some hard-to-shake misconceptions–myths, if you will–about financial freedom.
See if you relate to any of these myths when it comes to financial freedom:
Myth #1: You Need to Be Debt-Free to Achieve Financial Freedom
Physicians are no strangers to debt. I talk to residents all the time who tell me that they have over $300,000 in debt. The highest I’ve ever heard someone mention is $450,000. It’s crazy…
Add in a home mortgage and a few cars and you’re talking debt well into the millions. Buy a rental property and your debt could easily cross the $2 million mark.
But if your goal is financial freedom, then the only way to achieve that is to get rid of all that debt. Right?
Well, not really.
Remember, financial freedom is not necessarily a number. It’s the idea that you can do whatever you want, whenever you want, with whomever you want.
If you have $10,000 in debt payments each month but you have other sources of income that bring in $20,000 each month, you’re still making $10,000 per month. And if you can live your current lifestyle on that amount, then guess what? You’re financially free.
There are those who teach that all debt is bad. Personally, I believe there is good debt and bad debt. I think of good debt as an investment; it helps increase your cash flow or net worth. Bad debt is typically used to buy a depreciating asset–meaning that its value goes down with time.
What falls into each category? Well, the debt that you took on for your education or for your rental property is most likely good debt. Bad debt is the debt used for cars or luxury goods.
I’m not saying you shouldn’t try to be debt-free. There’s definitely a huge mental benefit of not having debt, and I completely get that.
However, I’m trying to go the more balanced route. I use debt as a tool to achieve my ideal life. If it helps me get closer to that goal, then I’m comfortable keeping the debt. If it doesn’t, then I get rid of it as soon as possible.
[Editor's Note: There's no doubt that leverage works, but it works both ways and lots of people use the concept of leverage to justify overspending. Don't be one of those.]
Myth #2: I’m Too Young To Be Thinking of Financial Freedom
The same can be said for financial freedom. It is in no way an overnight success. Anyone who tells you otherwise is selling you something.
That process starts with figuring out your outcome, why you want it, and then taking actionable steps in order to get there.
The sooner you start thinking about it, the sooner you’ll reach that goal.
Do you really want to wait until financial independence becomes a necessity? Don’t wait until your job becomes less stable, or life changes, or you’re burnt out.
Do you want to have a long, sustainable career? If so, it’s worth thinking about from the very beginning. That way, you have a clear path to follow.
Myth #3: You Have to Fully Retire to Reap the Benefits of Financial Freedom
As you may know, I am a big proponent of a gradual retirement. That means that as you create other income streams and supplement your income, you can decrease your time at your day job until you find a happy, sustainable balance.
It’s really replacing one income for another. The thing you gain is time and the choice to do whatever you want with it.
I believe that life should be about more than working yourself to death for 30+ years, retire, and only then learn to enjoy yourself.
By planning for financial freedom earlier on, you can start to take less hours at your day job, and slowly transition into retirement.
Actually, my hope is that you never feel the need to retire; that you enjoy what you’re doing and do it because it fulfills you and helps you continue to grow and contribute.
Those seem to be the happiest physicians in the hospital – the ones that don’t need to work, but do so because they have a passion for it.
If you’re financially free, then medicine becomes a well-paid hobby.
Ultimately, as we celebrate our freedoms this year, it’s a perfect time to assess where you are in your journey. If you haven’t started yet, then there’s no time like the present. You don’t have to have everything in perfect order to take that first step.
And even if you’ve already reached financial freedom, take some time to celebrate independence day–in more ways than one.
What are some misconceptions you had about financial freedom? Are you wondering if something you are doing is recommended or advised against? Leave us a comment below to share your story!
I completely agree with the concept of good and bad debt.
Debt to invest in yourself, as long as it is limited, is good. My 10k in student loans many years ago, paid off with a fulfilling career and many millions of dollars in income.
Debt to purchase appreciating assets, also good. I borrowed hundreds of thousands to buy investment real estate. The debt is now fully paid off from the rental income derived from those properties. I now have many millions of dollars in equity and a six figure passive annual income.
Debt to purchase a reasonably priced, long term home. Also pretty good. I have paid that off as well.
Debt for vehicles, bad. The asset depreciates. In my view, if you cannot pay cash for a vehicle, you cannot afford it. While I currently own an expensive EV, paid for with spare change, I have also owned a beat up Camry purchased for $300 cash in my younger days. Maybe that is why I can buy any vehicle I want today, for cash.
And finally, the absolute worst debt, credit cards. If you carry credit card debt, congratulations to the banks, because your future is theirs. You pay a huge premium for everything you buy, and you pay it to the banks. Ouch!
Money is fungible. Borrowing at 6% to buy an investment property doesn’t magically make it better than a 2% auto loan.
I’d get over the “good debt/bad debt” mindset. Any time you have debt and are spending more than the absolute bare minimum on your life, then you’re living on borrowed money and ought to be okay with that.
I’m not saying leverage doesn’t work. It does. (In fact, it works both ways.) But I know plenty of dentists making $150K with $1.5M in “good debt.” Trust me, at that ratio, it isn’t good debt.
$10K in school loans?!? Did you only attend for two weeks???
It’s been awhile for me also, but $12,500 is what I remember paying off back in the day. 😉
Bad debt, good debt has a nice soundbite quality that I initially liked after hearing about in Rich Dad, Poor Dad. Unfortunately, simplifying things into two rigid categories is misleading and I’ve stopped using those terms over the years. Buying an investment properly for 125% ARV is bad debt. Taking advantage of no-cost finance offers to float something for a year that you’d purchase anyway is good debt. The old quote “Nothing’s good nor bad, but thinking makes it so” comes to mind.
Learning about personal guarantees, unsecured vs. secured, interest rates and debt cashflow are more useful than labelling it good or bad. But if the phrase “bad debt” terrifies someone into living a only-buy-it-with-cash mentality, I’d be pretty happy for them and optimistic about their financial future. I definitely wouldn’t try talking them out of it.
The problem with that attitude is a lot of people say “it’s good debt, no sense in paying it off. In fact, I’ll get more of it.” So more money gets spent and less goes toward building wealth. Holds a lot of people back. I don’t know very many debt free people who aren’t either already wealthy or rapidly becoming so.
I’m in my mid-30s and looking forward to marriage and children in the coming years. My only debt now is my mortgage and with my side-hustle I make much more money than I need. So right now I’m putting away $100k per year into various retirement and brokerage accounts as well as putting a little extra towards my mortgage. I figure my version of financial freedom will be to quit my day job (but keep my side-hustle) so I can mostly stay at home with the future kids.
Jim, insightful content and analysis as always. Your approach to work life balance and financial independence has echoed my thoughts Since I began working. It was useful to me to approach My high income earning years with the mindset of budget backwards and live life backwards. That mindset and structure of our finances allowed us to achieve financial independence at a much earlier age than I would’ve thought possible in my 20s. But more importantly, it has enabled our family to be generous as is our ultimate purpose.
Best regards ,in respect,
Mark.
I appreciate your kind words, but I didn’t write this post as noted in the first line.
Solid! You know, I kinda wish I had realized these things before I set out to become financially independent. It’s easy to get caught up with the chase and you (I) don’t really think about the logic behind financial freedom. And yet over these past years I’ve met people who are in all sorts of financial situations and are totally financially free – whether by the numbers or because of their mindset and certainly because of their wealth. Great post – thanks for highlighting this.